Episode 9: How can I invest my money?

Saving money will allow you to put aside money for when you need it, especially if you let it sit in a high-yield savings account. However, you won't actually be able to make money on your money, or have something that will not only be valuable now, but also be even more valuable in the future. That's the difference between money and wealth. Saving up isn't enough to make wealth, it's investing that will help push you over the edge.

Here's why - when you invest in something, you pay for an appreciating asset - something that will actually increase in value over time. Assets often experience exponential growth - which means that the more time you give an asset to grow, the more valuable it becomes. By moving your money into assets for yourself, you can grow the money you have to develop financial sustainability over time. You can also support yourself during retirement when you're not making a consistent income or receiving a pension from your work.

We want to specifically invest in securities - assets that we don't need to use in any way to generate value, but can trade with other people in a financial market. For example, if you buy a tractor, you have to actually farm regularly and sell your produce for profit in order for the tractor to actually be an asset. However, if you buy a farming company, or 50% of the farming company, you not only are entitled to its profits, but you can also sell that ownership to somebody else.

So what are these appreciating assets that can help you develop your wealth over time? There are various classes of assets, some of them more reliable than others. Let's start with the basics - stocks and bonds.

A stock is an ownership asset - when you buy stocks, you're buying a little bit of ownership in a money-making enterprise (a.k.a a company). For example, when you buy Google stock, you're essentially buying a teeny-tiny piece of Google's entire value. We'll talk more about stocks in the next episode - and how to really use and read them. With stocks, you can make money by holding on to them and selling them later on at high prices, or by receiving dividends - a small sum of money coming in on a regular basis from the company from their profits. Find out more about stock investing in Episode 8.

A bond, on the other hand, is a debt instrument - rather than owning a piece of a company, you become a creditor for a company or even the government! A bond is a type of security that is basically a loan from a company, government or organization with a fixed term and interest rate. When you invest in a bond, you'll receive regular interest payments, called coupons, until a fixed term - maybe 5 years - until you'll get back the principal, the original amount you loaned out. Typically, bonds, especially government bonds, are far more secure than stocks because they aren't subject to that much volatility.

Some bonds are callable - that means that someone can actually try to cash in a bond before it's initially set due date. You'll still get your principal back, but you might make less returns on investment than you would if the bond had played out over its term. To figure out whether a bond is actually worth it, you can look at the yield curve of a specific bond. That's exactly what it sounds like - it's a graph that shows you how the actual value of the bond changes with its maturity - or the time that's passed since it's been issued. A yield curve going up indicates that the bond is worth more as it matures, while a low yield curve suggests that it's worth less in the long term. If the yield curve is going down or flattening, that is sometimes even an indicator of recession or financial uncertainty!

Stocks and bonds reveal two fundamental principles in how financial markets operate - security and yield. Often, these two things are counterparts to each other - the assets that offer the most yield are likely to be risky than the assets that are secure. Stocks historically perform better and give a better return than bonds, but bonds guarantee some profit while stocks always run the risk of collapse.

That brings us to the first principle of starting your own investing - knowing your risk tolerance. Your risk tolerance is how resilient you are to potential losses, and whether you're likely to hold a depreciating asset until it goes up in value. This is really subjective, and entirely dependent on who you are as a person, but it determines the kinds of things you can actually invest in. If you're really risk-averse, you might want to consider a higher proportion of bonds, especially in a market where there are high interest rates, which means larger dividends, but if you're comfortable with fluctuations, entering the stock market can seem like a better option.

But stocks and bonds aren't the only option! You can also invest in real estate - which is just a fancy word for land or homes. When you own land or your own home, you technically own an appreciating asset which will go up in value. You might be able to sell your house for a higher price at which you bought it. With real estate, however, this is not a general principle, and more importantly, it does not apply to every place. If your region is losing its population, if interest rates are high, or - like in 2008 - housing prices rapidly deflate, you could potentially lose a lot of money, especially if you default on your mortgage and your house experiences repossession , where the bank might just take a hold of it.

Finally, you can invest in currencies - remember the whole "money" thing in Episode 2? Well, here's something you've probably experienced but never really thought about before - we don't actually use the same money everywhere. In fact, the value of certain currencies are constantly rising (inflation) and falling (deflation), which means that they can be exchanged for other currencies at different rates. What if you could actually bet on that volatility? Investing in a currency changing in value over time is actually a viable investment you can make, if you actually manage to invest in the right currency. When you invest in a national currency that exists in fiat or paper money, that's called foreign exchange or forex. When you trade with online currencies, like bitcoin or stablecoin, that's cryptocurrency trading or crypto.

As currency markets, both forex (FX) and crypto are highly volatile. This is because they are decentralized, with no specific regulatory authority, nothing setting baseline prices, and nothing that can prevent rapid inflation and deflation. They are highly subject to market fluctuation, and are heavily influenced by the movement of big investors, also known as whales. As such, these investments often need a level of expertise to enter, and are typically not recommended for the average investor, especially as there can be a lot of misinformation surrounding currency trading.

If you do decide to venture into the world of currency trading, it's important to keep one factor in mind - the use factor. With currencies, the thing that makes them valuable outside of market fluctuation is what they're actually used for. For example, a currency that isn't actually used that much in the global market or in a country that isn't actually going to see much growth, like Sudanese pounds, (currently in the middle of a civil war) or a meme-coin that's only worth a lot because somebody thinks that its funny, isn't actually going to lead to much long-term value in comparison to a stablecoin (bitcoin tied to fiat currency) that will be used for actual purchases, direct deposit and other financial services.

With all of these different types of potential assets, it seems difficult to actually choose one to invest in. Even if you do choose a category, you'd have to pick the specific stock or bond you want, the specific currency, or even buy a new house, right? Nope. In reality, the best way to invest...is to invest in a little bit of everything. This is the principle of diversification - of not putting all of your eggs in the same basket.

When you're investing, you want to ensure that a little bit of your money goes into more than one asset, so if that asset does lose value, you might be able to make profit off of something else. Instead on relying on one single investment to pull up your net worth, you can instead dilute risk by distributing your money across different assets. This is called asset allocation - the amount of money you're putting into a specific type of asset

This is where funds come in.

What if instead of owning a single stock, or a house, or even an amount of a currency...you could own 0.001% of hundreds of stocks? Or the back doors of ten different houses? That's what a fund does. It essentially pools together investors' money, invests it into many assets at once, and automatically gives you a diversified portfolio - one that is made up of small ownerships in lots of assets.

Funds come in all shapes and sizes - some are managed, which means that there's a person making decisions about what is actually invested in, but some are automated, which means that they just mirror an existing stock or group of stocks without really changing. Some funds are associated to stocks, some to bonds, and some to real-estate. Here are a few extremely common types of funds:

1. Target-Date Fund: These are funds, typically run by banks and financial institutions, that are designed to grow wealth before retirement. They essentially reallocate assets over time to become more secure over time. These are typically the simplest investments you can make, especially if you're a busy person or just not that into investing
2. Index Fund: These are funds that track the performance of an entire stock market. When you invest in an index fund, you're investing in the overall performance of the entire market, which is the total of every company within it. For example, when you invest in the Nikkei Index, you'll own a teeny-tiny bit of Mitsubishi and Toyota, alongside other huge Japanese companies. Index funds are automatic, so they don't have lots of fees involved
3. ETF: Exchange-traded funds are more specialized than an index fund but still contain more than one stock.These baskets of similar stocks can be invested in based on market trends
4. REIT: A REIT is a real-estate fund where the ownership of a property is broken up - think of it like buying a window in a house that's growing in value, or even ten different windows
5. Mutual Fund: These are actively managed funds where a finance professional will try to beat the market by picking assets. These funds that pursue highly risky opportunities are called hedge funds, and are typically designed for a specific income bracket.

You can make any of these investments from a special investment account - which allows you to hold and actually collect money from securities. Many countries will have an investment account that will offer you tax benefits, like the Roth Individual Retirement Account (Roth IRA) in the US or the Individual Savings Account (ISA) in the UK.

With all of this information on various things you can invest in, it's important not to lose sight of your big picture - why you're actually investing money in the first place. That brings us to the most important principle - time in the market is timing the market. There is no one perfect time to get into investing or specifically choose an asset, especially if you're not a finance professional and don't understand the exceedingly intricate complexities of the modern financial system. Instead, you'll be able to create real wealth by investing in assets that will grow your time and actually matter to you.